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Did U.S. Agricultural Policy Lock Farmers Into Wheat? the Capitalization of Farm Policies Into Land Prices in the U.S and Canada

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Did U.S. Agricultural Policy Lock Farmers Into Wheat? the Capitalization of Farm Policies Into Land Prices in the U.S and Canada A Service of Leibniz-Informationszentrum econstor Wirtschaft Leibniz Information Centre Make Your Publications Visible. zbw for Economics Alston, Lee J.; Rucker, Randal R.; Weidenmier, Marc D. Working Paper Did U.S. Agricultural Policy Lock Farmers into Wheat? The Capitalization of Farm Policies into Land Prices in the U.S and Canada Claremont Colleges Working Papers in Economics, No. 2000-27 Provided in Cooperation with: Department of Economics, Claremont McKenna College Suggested Citation: Alston, Lee J.; Rucker, Randal R.; Weidenmier, Marc D. (2000) : Did U.S. Agricultural Policy Lock Farmers into Wheat? The Capitalization of Farm Policies into Land Prices in the U.S and Canada, Claremont Colleges Working Papers in Economics, No. 2000-27, Claremont McKenna College, Department of Economics, Claremont, CA This Version is available at: http://hdl.handle.net/10419/94625 Standard-Nutzungsbedingungen: Terms of use: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Documents in EconStor may be saved and copied for your Zwecken und zum Privatgebrauch gespeichert und kopiert werden. personal and scholarly purposes. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle You are not to copy documents for public or commercial Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich purposes, to exhibit the documents publicly, to make them machen, vertreiben oder anderweitig nutzen. publicly available on the internet, or to distribute or otherwise use the documents in public. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, If the documents have been made available under an Open gelten abweichend von diesen Nutzungsbedingungen die in der dort Content Licence (especially Creative Commons Licences), you genannten Lizenz gewährten Nutzungsrechte. may exercise further usage rights as specified in the indicated licence. www.econstor.eu Claremont Colleges working papers in economics Claremont Graduate University • Claremont Institute for Economic Policy Studies • Claremont McKenna College • Drucker Graduate School of Management • Harvey Mudd College • Lowe Institute • Pitzer College • Pomona College • Scripps College Did U.S. Agricultural Policy Lock Farmers into Wheat? The Capitalization of Farm Policies into Land Prices in the U.S and Canada by Lee J. Alston Department of Economics and Political Science University of Illinois Research Associate, NBER Randal R. Rucker Department of Economics Montana State University and Marc D. Weidenmier Department of Economics Claremont McKenna College & Claremont Graduate University September 5, 2000 * Lee Alston and Peter Lindert initiated this project. We thank Lindert for his inights. For additional comments we are grateful to Frank Lewis, Marvin McInnis, and the participants at the NBER summer institute and a seminar at Victoria University in Wellington NZ. Lee Alston is grateful for financial support from the Earhart Foundation for the initial research for this project. 2 I. Introduction The twentieth century witnessed a array of government farm policies in Canada and the U.S. To the extent that the programs benefitted farmers the return to government programs would be capitalized into land values. The reasoning is straightforward. Any program designed to make farming more profitable raises the demand for all inputs into the subsidized farming activities. Of these, the input that is most inelastically supplied to the farm sector, usually land, will gain the largest percentage price gain. Since land is a durable asset, any expectation that the support policies (or other profit increasing activities) will continue will raise the purchase price of land. The initial landowners, rather than workers or prospective farmers or landowners, will pocket a large share of the gains. Conversely, a large share of any reduction in support will be translated into capital losses for current landowners. The capitalization effect is well understood though difficult to measure.1 The main obstacle to measuring the overall effects of farm programs on farm land prices is the difficulty of finding a sample, a laboratory experiment, in which the variables fluctuating most are farm policy and farm land values. In the usual time series it is hard to separate policy influences on land values from the effects of changes in technology, weather, demand, and transportation. This paper presents tests from the appropriate kind of sample, one dominated by variation in farm land values and farm policy. We follow the history of a strip of contiguous crop reporting districts in upper North Dakota and southwestern Manitoba where farmers initially concentrated heavily on wheat production. It is a region of fairly homogeneous climate, soil, technology, labor supply and capital supply, divided by an international border. To the extent that tax policies are relatively constant, major movements in farm policies should drive movements in land values. There are two possible reasons why we might not directly observe the capitalization effect in a ratio of land values from our sample: 1) Our approach assumes that crop mix on both sides of the border remains 1 See for example Schultze; Johnson (1984), pp. 25-28; Melichar (1979); Reinsel and Reinsal (1979); Doll and Widdows (1981); Melichar (1981); Castle and Hoch (1982); Scott (1983); Pope et al. (1979); Barry (1980) and Burt 3 the same throughout the period; and 2) farm policies on either side of the border could affect land values on the other side to the extent that either country can influence the world price. This is most likely to happen in response to U.S. agricultural policy with its emphasis on production controls through acreage restrictions. It is likely that these policies have an impact on world prices and that Canadian farmers could respond on two margins: intensive, i.e., higher yields and extensive, i.e., more acreage. The paper is organized as follows. In Section II we chronicle Canadian and U. S. wheat policy since World War I followed by a discussion of our data and empirical methodology in Section III. In Section IV we present our empirical results followed by (Section V) the implications of our preliminary results and our directions for further research. In Section VI we outline the tasks for a research assistant. We offer a conclusion in Section VII. II. Wheat Policy since World War I In this section we survey the U. S. and Canadian government policies that may have caused international differences in the value of wheat-growing prairie land. We abstract from world-market influences that are likely to have had the same effect on wheat prices in both countries. A. Canadian Wheat Policy2 Before the establishment of the Canadian Wheat Board as a monopsonist and monopolist in 1944, Canada did not directly intervene in the market for wheat, except during wartime and the depression years. On June 11, 1917, Canada established the Board of Grain Supervisors and gave it monopoly control of wheat. The Board was empowered to buy Canadian grain; to fix uniform national prices with regard to location, transportation costs, quality, and grade; and to resell grain to domestic millers and Allied purchasing agents (Fowke (1957) p. 169). Open market trading resumed on July 21, 1919 but closed again 10 days later to stem what was viewed as excessive speculative activity. On July 31, 1919 the Dominion government (1986). 2 For our historical treatment of Canadian wheat policy we relied on Fowke and Wilson (1957). For a more 4 established the Canadian Wheat Board and vested in it the power to buy and sell the 1919 crop. This one- year stop-gap organization went out of operation in August 1920. Because it was temporary in both intent and fact, we doubt that landowners significantly capitalized its perceived benefits into land values. The return to open market trading coincided with a sharp decline in the prices of wheat. Although there was no causal link between the cessation of the first Wheat Board and the wheat price drop, farmers argued strongly against free markets. They associated the high wartime and immediate postwar prices with monopoly marketing. As a result, farmers in the major wheat-producing provinces formed voluntary cooperatives to market their grain. The pools were organized in 1923 and 1924 and incorporated provincially. They operated in concert through a jointly owned Central Selling Agency that was incorporated in 1924 by the federal government. The pools marketed 37% of the 1924-25 crop and then slightly more than half the crop for the next five years. (Fowke (1957), p. 235). The motivation for the pools was a belief that speculators were reaping profits at the expense of producers. Particularly irksome to farmers was the fact that grain prices varied over the year. While the pools guaranteed farmers the same price throughout any season they could not suppress inter-seasonal price variation.3 Hindsight, suggests that the pools did as well as could have been expected, though they could not bring back the peak prices of the war years. The impact of the pools on land values depends on how firmly farmers believed pooling would solve intra- and inter-seasonal price variation and on whether they went through a bubble cycle in expecting a later discussion of the Canadian Wheat Board, see Schmitz and McCalla (1979) and McCalla and Schmitz (1979). 3 Debate broke out between the pools and the Winnipeg Wheat Exchange over who paid farmers higher prices. The evidence that exists is inconclusive (Levine, (1987), pp. 60-62). 5 return to wartime values.4 If they correctly perceived the pools as just a seasonal stabilizer, the net benefits would have been very small. As such we do not anticipate finding a measurable effect on farm values in the 1920s. Also small, we suspect, were the effects of the subsidization of credit through the Canadian Farm Loan Act of 1927. The provincial pools went bankrupt in 1931. In 1929 the Central Selling Agency overestimated the final market price of wheat and as a result made initial payments to farmers that exceeded the final prices received.
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